Rocket Pool — Sustaining Decentralization on Ethereum

A silent guardian, a watchful protector, a Rocket Pool.

The merge has been a constant talk for years in the Ethereum community. It simply means that the Ethereum blockchain which is currently a Proof-of-work blockchain in a similar mold to Bitcoin will transition to a Proof-of-Stake blockchain. This has enabled people to stake their ETH for ETH2.0 on the Beacon chain that can’t be unstaked. This allows you to secure the network and earn a passive income on your Ether by doing this.

Heads up: The Beacon Chain is a new blockchain that supports the proof-of-stake network with which the current Ethereum mainnet will merge. View it as the spine of Ethereum 2.0.

Enter Rocket Pool which is a decentralized trustless community-owned staking protocol. It is a protocol that allows you to stake it and still be liquid as you receive the token rETH. What’s the point of all of this? With the Ethereum foundation previously having a threshold of 32 ETH in order to stake Ether, the foundation now directs you to Rocketpool if you have less than this amount. It reduces the barrier to entry in order to get yield on your ETH (especially during this price action).

Why use Rocket Pool?

Rocket Pool enables you to access a decentralized service that rewards you for securing the protocol instead of going through Centralized Exchanges(CEX) like Coinbase and Binance that takes a cut, which makes you lose valuable ETH. There has been a market for CEX because obviously, not everyone have had the ability to run a node that requires 32 ETH. However, there is no free lunch.

As Rocket Pool lowers this barrier to 16 ETH the barrier to entry gets halved. Also, even if you can’t run a node for 16 ETH, the protocol still allows you to stake ETH with as little as 0.01. This is favorable for smaller players in the market that wants to retain liquidity while earning rewards simultaneously.

Furthermore, Rocket Pool allows “normal” participants to run a node which is the way Ethereum was intended to be used. It’s permissionless. Its competitor Lido which is the 3rd largest staking pool is not permissionless. It is refreshing to see protocols like Rocket Pool paving the way for smaller players as well.

Most validators (nodes) that the Beacon chain uses are currently run on Prysm (ETH2 node implementation), which is fine as long as Prysm runs faultless. However, if Prysm would go down it would affect the whole network as the concentration of nodes on Prysm amounts to 66% of the network. Rocket Pool has very small Prysm usage, which is beneficial for the decentralization of the network. If Prysm goes down, verifying transactions and consensus becomes a problem as 2/3 of the validators would be down. This is why Rocket Pool has an important part to play in the decentralization of the network and usage is being incentivized. Rocket Pool is closing in on running 1% of the validators on the Ethereum network. The leaderboard can be tracked here.

(If you are interested in running a node, you can find the instructions here.)

Tokenomics

The tokenomics of the protocol have changed over the years. The protocol allows you to get a greater yield staking ETH inside the protocol than outside the protocol. However, there are two tokens to take into consideration when you’re interacting with the protocol. The first one is rETH which is the protocol’s liquid staking token. These tokens represent the amount of ETH you have deposited and act as a receipt for the staked ETH. You can either acquire rETH by staking your ETH in the protocol or using a Decentralized Exchange (DEX) like Uniswap to acquire it on the market. The rETH token can be found on layer-two solutions as well including Arbitrum, zkSync, Optimism, and Polygon.

This is how the rETH token accrues value:

rETH:ETH ratio = (total ETH staked + Beacon Chain rewards) / (total ETH staked)

Since the rETH token collects rewards from being staked, it is bound to increase in value against native ETH.

The 2nd token to factor in the equation is the RPL token, which is the native token of the Rocket Pool protocol that gives you governance rights and incentivizes staking inside the protocol than outside of it. The token has a total supply of 18,000,000 and a 5% inflation rate to reward participants that work in the protocol’s best interest.

Considering people run nodes for a deposit of 16 ETH, the performance of rETH is based on these nodes. If they perform poorly as stakers, there is a chance that their rewards get slashed, which would slow down the value accrual for the people holding rETH. This is why the protocol added an additional incentive by requiring node operators to have 1/10th of the ETH deposited as collateral in RPL tokens. This collateral acts as a security in case a node operator would have their rewards slashed.

In return for providing this collateral, the node operators earn RPL rewards in addition to the ETH staking rewards and commission from the node participating in consensus. This means added security for the node operators along with more rewards earned.

A question that might arise as you are going through this is why Oracle DAO and Protocol DAO are getting a 15% allocation respectively from the annual emission?

Oracle DAO and Protocol DAO
Oracle DAO consists of the node operators on the Rocket Pool protocols that run oracle nodes. These run as regular nodes except for one thing, they perform extra oracle duties for the protocol. The oracle duties involve reporting validator balances on the Beacon chain and RPL:ETH ratios etc. They get rewarded for these services.

Protocol DAO is responsible for settings concerning the protocol and will be run on RPL governance. This will be related to the development of the protocol and making sure things such as the treasury are run smoothly. Protocol DAO is not fully operational yet but its release stage. However, the responsibilities that are taken upon by Oracle DAO and Protocol DAO are the reason why they are getting their respective allocation from the annual emission.

How to stake ETH on Rocket Pool

So how do you stake your ETH on Rocket Pool?

• Acquire ETH on a DEX like Uniswap (or CEX if you prefer that)
• Go to stake.rocketpool.net
• Stake your ETH on the website
• You receive rETH in return that will increase in value over time while you can stay liquid and use the token in other DeFi protocols.

Main Competition

The main competition to Rocket Pool is the well-established Lido Finance. The protocol has made stETH the industry standard in regards to staked ETH2.0 that is liquid and can be used to participate in DeFi. The token stETH does not work in the same as rETH because stETH is pegged 1:1 to ETH and represents the amount of ETH you staked. Whereas, rETH works similar to an index that accrues value over time and increases against native ETH as mentioned above. However, the downside to Lido Finance despite the amazing job they have done is that it is permissioned and much more centralized than Rocketpool. You have to get permission in order to run a node for Lido finance. Whereas, anyone can start a Rocket Pool node as long as they fulfill the prerequisites.

Despite Lido having 52,832 stakers on ETH they only have 22 active node operators, in other words not so decentralized. Considering Lido also currently has 21% of all ETH2.0 staked through their validators, further distribution is for the benefit of the network. Rocket Pool on the other hand has 888 node operators and the number is growing.

Another competitor that is on the up is StaFi protocol, which also offers you the chance to stay liquid while staking your ETH. Competition is healthy and good for the long-term sustainability of the Ethereum network.

Incentivizing Liquidity

To incentivize people to use rETH instead of stETH or ystETH (Yearn Finance version of stETH), a liquidity pool was added on Curve to promote decentralization. This means that the rETH token is able to compound rewards on top of earning yield from being staked in ETH2.0. Curve emissions are directed to the rETH/wstETH pool and currently give you a max APY of roughly 9%. That’s some juicy yield, to say the least. The pool can be found here. This pool has gained fantastic support from major players in the space, Tetranode being one of them which is welcome. @jasperthefriendlyghost made a fantastic thread covering this if you want to dive deeper into it.

There is also another pool consisting of ETH/rETH that gives you a smaller reward of roughly 1.05% max APY on top of the ETH2.0 staking. The choice is yours.

Risks

As with any DeFi protocols, there are some risks involved. The main risk you have from depositing your previous ETH on Rocket Pool is smart contract failure. However, the protocol has been duly audited by credible auditors such as Sigma Prime, Consensys Diligence, Trail of Bits, and Immunefi Bug Bounty. With these audits performed, the protocol is deemed secure and in good stead. A major exploit would be surprising but it is of course a higher risk than staking it on the Ethereum launchpad. However, this would mean that your deposited ETH would be illiquid and locked up until the merge is complete.

Personal Thoughts

I will always support decentralization since it is the ethos this industry is built on. This is why I would endorse using Rocket Pool in case you sit on a solid amount of ETH that you want to earn a yield on. Considering you can boost that yield right now in the Curve pool as well, it is a good opportunity that will benefit the long-term future of the Ethereum network. However, as many people are profit maxis there are other opportunities out there that might be more interesting in the short term as I have covered in other articles. Nonetheless, Rocket Pool is a net plus for the benefit of Ethereum and hopefully, the growth continues.